Gold tumbled into bear-market territory on Friday, underscoring how money managers' search for yield has trampled one of the most resilient post-financial crisis wagers.

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Shine fades for the yellow metal.
Bloomberg News

Over the past decade, the precious metal had attracted legions of investors, first as it became easier to bet on gold with the introduction of exchange-traded funds backed with physical gold, and then as gold notched double-digit gains in 2009 and 2010.

Many gold investors have headed for the exits in pursuit of better returns in the U.S. stock market, where benchmark indexes have hit record highs. Meanwhile, the traditional catalysts for gold prices—inflation worries and financial-market turmoil—have ebbed somewhat, further dimming gold's appeal.

Friday's selloff bolstered expectations that 2013 might mark the end of gold's 12-year bull run. Gold fell $63.30, or 4%, to $1,501 a troy ounce on the Comex division of the New York Mercantile Exchange, after falling as low as $1,480.20 during the day. It was the lowest close since July 2011 and the biggest one-day decline in dollar and percentage terms since February of last year. Gold fell 4.7% for the week.

A bear market is defined roughly as a 20% drop from a recent peak. Gold hit a record of $1,888.70 an ounce in August 2011, a month when jitters about the euro-zone's debt load were ramping up and Standard & Poor's Ratings Services yanked the U.S.'s triple-A rating.

Some traders viewed the drop below $1,520 an ounce as an important move because that level provided some support in the past. Friday's fall turned some traders, such as Stephen Klein, a portfolio manager at New York hedge fund AT Global Capital, into bears. Mr. Klein had spent the past two years on the sidelines. "At this point, it looks like gold has gone over a cliff," Mr. Klein said. "Gold has always been sentiment-driven, and now the price action shows you that sentiment has changed."

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On Wednesday, Goldman SachsGS-1.03% became the latest player to sour on gold, lowering price targets and saying a rebound in prices was "likely several years away."

During its rally, gold has drawn big-name hedge-fund managers. Some reaped large gains but are stumbling now.

The gold fund managed by John Paulson's Paulson & Co. was down 28% in the first quarter, according to an investor letter. It was unclear how the Paulson & Co. fund performed on Friday. Mr. Paulson owns a majority of the gold fund, which is one of the firm's smallest funds, at less than $900 million.

"The recent decline in gold prices has not changed our long-term thesis," said John Reade, a partner and gold strategist with Paulson & Co., who noted that the fund began scooping up gold when it was trading at around $900 in April 2009. "Federal governments have been printing money at an unprecedented rate. It is this expectation of paper currency debasement which makes gold an attractive long-term investment for us."

Many investors in recent years had bought gold as a hedge against inflation. A widespread assumption by gold bulls was that the Federal Reserve's bond-buying program, which is aimed at keeping long-term interest rates low and stimulating economic growth, would cause a broad-based increase in prices.

So far it hasn't, undercutting the case for buying gold. The U.S. producer-price index, meanwhile, fell 0.6% in March from February, the Labor Department reported.

"Inflation is definitely not a concern right now, and it's unlikely to become a major concern in the future," said Rohit Savant, senior commodity analyst with CPM Group, a New York metals consultancy.

Gold's plunge into bear territory took less than 20 minutes, starting at 10:25 a.m. in New York and breaching the bear threshold at 10:44 a.m., with the volatility triggering a 10-second trading halt midway through.

After heavy selling all morning, trade data show the market began to be flooded with sell orders as large as 12 contracts at a time while buy orders were less than half that level. It fell $23.60 a troy ounce, or 1.5% in that period, and continued to fall to the intraday low of $1,480.20 before turning back up.

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Some investors also cited the situation in Cyprus, where a draft document proposed central-bank gold sales of over $500 million to fund a bank bailout.

Either way, once gold began to fall, the selling cascaded with few investors willing to step in and buy, traders said. One internal email within a New York investment bank said: "No willing buyers seen."

Gold's long rise was aided along the way by the introduction of ETFs. SPDR Gold Shares, the world's largest gold ETF, drew in billions of dollars and briefly became the world's largest ETF by value, eclipsing the SPDR Standard & Poor's 500 stock-index ETF. But the gold ETF's hoard is down 13% from the record 1,353.35 metric tons in December, as sales by big hedge funds sent some investors fleeing.

"For a while, gold was seen as the key commodity to own, and that view was appropriate in 2000, when stocks were overvalued and over-owned," says Tobias Levkovich, Citigroup'sC-0.71% chief U.S. equity strategist. "Once again, stocks look like a far better investment to hold."

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A worker holds a polished gold alloy bar in a workshop. Gold dipped into bear-market territory on Friday.
Reuters

All eyes are likely to be on the market opening Sunday evening. Many worry that brokers may require clients with gold holdings to post money, known as margin collateral, to keep positions open.

If those investors decide instead to leave the market, that could lead to another wave of selling. Continued price declines also could reactivate hedging programs by gold-mining companies, exacerbating losses as producers hedge against lower gold prices by entering contracts to sell future production at a specified price, said Robin Bhar, head of metals research at Société Générale.SCGLY0.82%

"Who can afford to hold gold in this environment?" said Adam Klopfenstein, senior market strategist with Archer Financial Services in Chicago. "With prices falling so much, you better have a lot of money behind you if you plan to hold gold."

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